BLENDED FINANCE INTERVIEW: “A low-carbon climate resilient future ultimately hinges on mobilising private capital”

Exclusive interview with Aakif Merchant, Director, Engagement and Capacity Building and Head of Africa, Convergence. Aakif is an advisory board member of Africa’s Green Economy Summit and will chair the finance session at the third edition of AGES in February 2025.

You have an extensive background in blended finance. Please give us some background on your career thus far.
My name is Aakif Merchant, and I am a development finance professional and a director at Convergence Blended Finance. Convergence Blended Finance is an organisation that educates, guides and informs the discourse and builds capacity and ecosystems around the concept of blended finance. I live in Kigali on the continent of Africa, having lived in North America for many years, and I currently lead all of Convergence’s work across the continent, whether that is thought leadership, engagement with all of our members, be they the development finance institutions, the various UN agencies or the various banks on the continent. I also lead our capacity building and engagement work here with a wide variety of our clients as well.

Tell us more about Convergence and the type of deals that you work on? What is unique about the way you do blended finance and who are your partners?
Convergence is essentially a field builder when it comes to blended finance. We’re set up to do two things: We provide grants to early stage innovative financial structures and financial concepts that we think have the ability to go on and raise private capital. We are in possession of grants from a range of different donor agencies, and depending on their interests and their need, we have a call for proposals and then disperse these grants.

For those of you who are listening, you might be familiar with Africa GreenCo. That’s one of the organisations based on the continent that’s serving to disintermediate the Southern Africa Power Pool. That’s one of our grantees from our grant programme. So we’re really motivated to find the next generation of ideas and seek those concepts with the design grants.

The other part of our work at Convergence is building a community of practice. We have over 200 different members from around the world, from the Japanese government all the way to the Brazilian government and their DFI BNDES, and various different organisations in between. We serve to educate, guide and connect all these different organisations to give them visibility, to build their capacity, to make the right connections and to guide and educate them with respect to their activity within the blended finance ecosystem so that they are making more informed decisions and are mobilising capital at scale.

Why is blended finance considered central to the achievement of a low-carbon, climate resilient future?
The achievement of a low carbon climate resilient future ultimately hinges on mobilising private capital. Private capital is what will get us over the frontier when it comes to the next generation of energy transition. Now, capital is sitting on the sidelines and not invested in the continent of Africa for a variety of different reasons, or you have capital residing within Africa that is not mobilised to the right sectors for a variety of different reasons, primarily an interplay between risk and return. So essentially, what blended finance does, and blended finance is a financial structuring approach, but what we do through the concept and through the use of blended finance is to shift that risk, or to take that risk off the table, such that those investors that I was talking about sitting on the sidelines are more inclined and more motivated to now participate in transactions and support various different initiatives and various different projects that can get us to that low carbon climate resilient future.

Are there specific sectors in the green economy that are most suited to these kinds of financial structures?
There are a range of different sectors in the green economy that are most suited to blended finance. Inherent in the definition of blended finance is mobilising private capital, and private capital always seeks a positive financial return. Therefore, you need to support projects or transactions that have underlying cash flows that can pay back investors. So when you think about climate as a broad construct, and you look at climate as climate mitigation or climate adaptation, most of the transactions that we’ve seen that lend themselves well to blended finance are climate mitigation transactions, whether that is solar transactions, run-of-the-river hydro, wind power and energy efficiency and so on. That’s because these transactions have underlying cash flows and standardised business models that can pay back investors. When you think about climate adaptation, how do you build cash flows around mangrove restoration or land degradation or building a dry seawall to prevent the sea rise and coastal erosion? These kinds of models are not well understood, they’re not standardised and they haven’t been scaled.

So, when I think about the green economy and blended finance, we have a much higher intersectionality when it comes to climate mitigation. Having said that, we at Convergence are thinking about natural capital, thinking about nature-based solutions, and are trying to support and are trying to fund the next generation of business models and the next generation of financial structures that will solve for the problem that I just mentioned earlier.

What in your view are success stories of blended finance up until now?
For far too long, blended finance has been a cottage industry of very many smaller bespoke transactions. What we’ve needed, and what we at Convergence have advocated, is the concept of standardisation and scale. Over the last few years, we have seen several of what we call unicorns in the blended finance ecosystem. These are billion dollar transactions that have managed to take in the various different archetypes that we talk about in blended finance, diversify across geographies and diversify across various different currencies and really use this financial structure to mobilise large-scale institutional private capital at scale.

Some examples come to mind: the SDG Loan Fund, supported by Allianz Global Investors and the Dutch Development Bank FMO, has a specific pillar that is focused on renewable energy and the green economy. We also have Climate Investor One, one of the largest standalone climate-focused blended finance funds at around $850 million. We also have the BlackRock Climate Finance Partnership, which was a $1 billion transaction.

So, some of the success stories of blended finance are just getting started. We are seeing larger mainstream institutional capital coming into these structures, and we are seeing billion-dollar deals close, and that’s what we need in order to achieve the SDGs, because we only have about six years.

How can Africa benefit from blended finance?
Africa has a large funding deficit, whether you look at Africa’s needs from a climate perspective, Africa’s needs from an education perspective, from an infrastructure deficit perspective or from an SME finance perspective. A large percentage of international finance does not flow to Africa. In fact, we only have around two countries in Africa that have an investment grade rating, that is triple B minus or higher, and those countries are Botswana and Mauritius. So, by default, most of the transactions in Africa are non-investable when you think about mobilising large scale institutional investors. So, blended finance is a financial structuring approach that can help structure around these constraints that I mentioned earlier: small ticket size, currency fluctuations and currency risk, sovereign credit ratings. And so, through a creative use of blended finance, you can set up structures that can mobilise capital for the needs of Africa across the various sectors that I mentioned earlier, mitigating for the various risks, even political risk and regulatory risk, which are also big issues in Africa.

So, Africa is really primed to be a recipient for blended finance. In fact, when we look at all the blended finance transactions in the world, and we’ve captured around 1,200 transactions at Convergence, half of those have been delivered and have mobilised capital on the continent. We need to scale those transactions and spread them across Africa, away from South Africa and Kenya and Nigeria, who are the usual suspects, to the other countries on the continent, such as Senegal, Zimbabwe, Zambia or even Ethiopia. Blended finance has a tremendous amount of potential in Africa, and we’re just getting started.

Convergence is a partner in the upcoming Africa’s Green Economy Summit. How important is such an event for the continent?

Our partnership with Africa’s Green Economy Summit is something that’s very close to our hearts. Africa’s Green Economy Summit will be in its third edition next year in 2025. We participated in the last edition in Cape Town, and we saw the various different stakeholder groups that have come together to engage in these conversations and to engage in these various different transactions.

Now again, blended finance is the coming together of various different forms of capital: capital from the foundations, the donor agencies, development banks and large financial institutions. And this is why it’s important for us to partner with organisations and with institutions like Africa’s Green Economy Summit, because your summit is where everyone comes together to elevate the level of discourse, to discuss best practices and to actually support transactions and to close transactions and to get transactions over the line. That is what Africa’s Green Economy Summit is all about. That is what Convergence is all about. And that is why we hold our partnership with AGES in high esteem. And we’re really looking forward to AGES 2025, where I will be moderating a panel on the intersection of blended finance and the green economy.

Why do you think AGES is the best platform?
I think AGES is a very important platform because there aren’t that many convening spaces on the continent where leaders across government, civil society, finance and indeed, even academia, come together to talk about what are the policy bottlenecks for the green economy, what are the financial bottlenecks of the green economy, and what are the various innovations from a science and technology perspective as well.

So this is not just a finance conversation, but this is a conversation that straddles many other realms. And that’s really why I think AGES is a great platform. It is a very, very interesting and intriguing platform for us to be a part of and for all of you to keep your eye on and to consider joining and participating at next year’s summit in Cape Town in February of 2025.